“Uh ... correct,” Jill said, a little bit impressed by his math skills. She could not do that that fast, after all.
“So, how much total royalties are we paying out for the quarter?” asked Celia.
“If you’ll look on page two of the document,” Jill said, “the total is listed.”
Everyone turned to page two and spent a moment scanning. Jake whistled appreciably when he saw the figure. “Seven million, three hundred and forty-six thousand, four hundred and sixteen dollars and forty-eight cents,” he recited. “Which means we get to keep this amount...” He put his finger on the paper and recited it. “Eight million, two hundred and fifty-three thousand, five hundred and eighty-three dollars and fifty-four cents?”
“That is correct,” Jill said.
“Not bad at all, eh?” Jake said with a nod.
“And that’s just this quarter,” Nerdly said. “Both albums show every sign of selling at least another million or so in the current quarter.”
“Hell to the yeah,” said Jake.
“Please stop saying that,” Pauline requested.
“Sorry,” Jake said. “I’m getting better.”
“Before we get too far ahead of ourselves here,” said Jill, “I should remind you that the royalties are only the primary expense. There are several others.”
“Well ... naturally,” Jake said. “There’s the rent on this office we’re sitting in and your firm’s fees.”
“Right,” Jill said. “Rent on this building cost KVA nine thousand dollars during the first quarter. Fees to the firm of Yamashito, Yamashito, and Yamashito equaled twenty-five thousand dollars plus travel expenses equaling another four thousand six hundred and eighty-three. Utilities and maintenance fees on the building ran one thousand eight hundred and forty-two. City and state fees related to the operation of a business ran six hundred and nineteen. Catering and entertainment expenses were pretty light this quarter since you’re not practicing in here yet: only two hundred and eighteen dollars so far.”
“That all sounds pretty much like chump change when stood up against the royalties we pay out,” said Jake.
“Perhaps,” said Jill. “But chump change needs to be counted to the penny as well as non-chump change. And chump change can add up.”
“I suppose,” Jake said with a shrug. He pointed to a spot on the third page of the sheet. “This appears to be the bottom line, right?”
“That is the total profits for the quarter,” Jill said.
Everyone turned to that figure. It was $8,212,221.54.
“That’s the money we have to play with for the quarter then?” Jake asked.
“Correct,” Jill said. “In addition, we have six hundred and forty-three thousand, three hundred and eight from the previous quarter still sitting in our account, along with the one hundred and eighteen thousand, one hundred and eleven left over from the original investment money. That gives KVA a total of eight million, nine hundred and seventy-three thousand, six hundred and forty dollars and forty-six cents as of the close of the first quarter of 1993. Now, the question is what would you all like to do with it?”
“Party our asses off!” Jake said enthusiastically.
“Well ... yes, I’m sure you will want to do that,” Jill said. “But aside from that, how should we distribute this profit?”
“We divide it up equally,” said Greg. “That’s what is spelled out in our operating agreement, is it not?”
“Yes, that is an option,” Jill said. “I was never suggesting that we divide up any distributions in anything other than an equal manner. What I want to know is how much do you want to distribute?”
“We don’t want to distribute it all?” asked Greg. “After all, there will be a similar amount coming in next quarter, right?”
“In all likelihood,” Jill agreed. “But it would be my suggestion that you leave a considerable amount in the LLC’s accounts to secure further operations. Jake and Celia both plan to put out another record, right?”
“I do,” Jake agreed.
“So do I,” said Celia.
“It seems likely then that production of two further albums will cost at least as much as it took to produce the two you already have, if not more. The figure of what these two albums cost is on page two of the document.”
They all turned there and saw that the composition, production, manufacturing, and distribution of The Struggle and Can’t Keep Me Down cost KVA Records a grand total of four million, eight hundred and twenty-six thousand, four hundred and eighteen dollars and ninety-three cents. And that figure would continue to go up as they paid for more manufacturing and distribution as the CDs sold. Promotion costs, of course, were accounted differently as they were covered by the royalties being paid to Obie.
“I don’t think further CDs will cost quite that much,” Pauline said.
“No?” Jill asked.
“No,” Pauline said. “A lot of that expense was first time start up expense that will not need to be repeated. In addition, now that KVA has put out two best-selling albums, we’ll be able to negotiate from a position of strength on our next efforts. We should be able to negotiate a royalty rate of around twenty-five to thirty percent with National if we agree to sign with them for the next round.”
“We sign with them?” asked Jake. “What about Obie?”
“Obie was a great help getting the deal we have now because we were an unknown risk,” Pauline said. “He was able to use his influence and reputation to get us that forty percent we now enjoy and he is profiting from the deal quite well. I doubt, however, that he would be able to offer us a lower rate than what the major labels would offer now that we’re hot commodity.”
Jake looked at his sister sharply. “You would just dump Obie, just like that?”
“I would let him attempt to match or beat whatever the best offer was,” she said. “But if he did not or could not ... hell yes I would dump him. This is business. Our personal relationship has nothing to do with it. I’m sure Obie understands that as well.”
Damn, that’s cold, Jake thought, but did not say.
“What are you saying then, Pauline?” Greg asked. “Do you think we’d be able to get two more albums recorded and mastered for three million?”
“I think that sounds like a reasonable figure,” Pauline said.
“Then you think we should leave three million in the KVA accounts and distribute the rest?” asked Celia.
“I’ll vote for that,” Nerdly said. “That would allow us to recoup our original investment and our secondary investment and still have a reasonably significant capital gain for the quarter.”
“Sounds cool to me,” Jake said with a shrug. “After all, we’ll have another eight or nine mil coming in this quarter.”
“What about taxes?” Greg asked.
“You have to pay them,” Jake said. “I’ve found, in my experience, that Uncle Sam and Aunt California absolutely insist upon that.”
Greg rolled his eyes. “Of course we have to pay taxes,” he said. “I pay enough to have my own F-14 fighter. What I mean, is does the LLC have to pay taxes on that three million we’re leaving in the account?”
“You all have to pay taxes on that,” Jill said.
“Even though it’s for reinvestment in the company?” asked Pauline.
“It’s part of the profit made by the LLC,” Jill explained. “Do you remember the reason we set you up as an LLC in the first place? It was to protect your personal finances from liability and set up distribution of the income from the investment. Taxes are still very much part of the picture, however. A limited liability company utilizes pass-through taxation. That means that the company itself is not taxed, but the members in it are taxed on the profits and must account for those earnings on their personal tax returns. You will be responsible at the end of the year for all of the profits you earn as members of this venture whether you leave some of it in the KVA account or not. Once you start spending that three million in the account on the next albums, you’ll be able to deduct those expenses against the profits that were made from that investment. Does that make sense?”